Intrinsic value of NewMarket - NEU

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$455.90

  Intrinsic Value

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  Rating & Target

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  Value-price divergence*

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Previous close

$455.90

 
Intrinsic value

$334.89

 
Up/down potential

-27%

 
Rating

sell

 
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*Intrinsic value change (in %) minus stock price change (in %) in the past 12 months.

We calculate the intrinsic value of NEU stock by summing up the current values of future distributable cash flows generated by the company and dividing the sum by the number of outstanding shares. As such, the intrinsic value calculation depends entirely on projections. The more accurate your projections of the company's performance are - the more reliable is the intrinsic value calculation result. Please make sure to check the stock valuation input data below and adjust it if necessary. The quality of the output (intrinsic valuation result) is only as good as the quality of the input. See also DISCLAIMERS.

STOCK VALUATION INPUT DATA

Revenue (in 2016), $M
Initial revenue growth rate, %
Terminal revenue growth rate, %
Revenue decline factor
Initial discount rate, %
Discount rate multiplier
Variable cost ratio, %
Fixed operating expenses, $M
Interest rate on debt, %
Effective corporate tax rate, %
Production assets / Revenue, %
Life of production assets, yrs
Working capital / Revenue, %
Revenue / Adjusted assets
Adjusted equity ratio
Cash flow adjustment, % of Revenue
Book value of equity, $M
Shares outstanding, mln
Market capitalization, $bln 5.4

 

FINANCIAL STATEMENTS FORECAST and PRESENT VALUE CALCULATION

Fiscal year
2016(a)
   2017
   2018
   2019
   2020
   2021
   2022
   2023
   2024
   2025
   2026
   2027
   2028
   2029
   2030
   2031
   2032
   2033
   2034
   2035
   2036
   2037
   2038
   2039
   2040
   2041
   2042
   2043
   2044
   2045
   2046

INCOME STATEMENT

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue growth rate, %
  -4.30
  4.60
  4.64
  4.68
  4.71
  4.74
  4.76
  4.79
  4.81
  4.83
  4.85
  4.86
  4.87
  4.89
  4.90
  4.91
  4.92
  4.93
  4.93
  4.94
  4.95
  4.95
  4.96
  4.96
  4.96
  4.97
  4.97
  4.97
  4.98
  4.98
  4.98
Revenue, $m
  2,049
  2,143
  2,243
  2,348
  2,458
  2,575
  2,697
  2,826
  2,962
  3,105
  3,256
  3,414
  3,580
  3,755
  3,939
  4,133
  4,336
  4,549
  4,774
  5,010
  5,257
  5,518
  5,791
  6,079
  6,380
  6,697
  7,030
  7,380
  7,747
  8,133
  8,538
Variable operating expenses, $m
 
  1,785
  1,868
  1,955
  2,048
  2,145
  2,247
  2,354
  2,467
  2,586
  2,712
  2,843
  2,982
  3,127
  3,281
  3,442
  3,611
  3,789
  3,976
  4,172
  4,378
  4,595
  4,823
  5,062
  5,314
  5,578
  5,855
  6,146
  6,452
  6,773
  7,111
Fixed operating expenses, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total operating expenses, $m
  1,687
  1,785
  1,868
  1,955
  2,048
  2,145
  2,247
  2,354
  2,467
  2,586
  2,712
  2,843
  2,982
  3,127
  3,281
  3,442
  3,611
  3,789
  3,976
  4,172
  4,378
  4,595
  4,823
  5,062
  5,314
  5,578
  5,855
  6,146
  6,452
  6,773
  7,111
Operating income, $m
  363
  358
  375
  392
  411
  430
  451
  472
  495
  519
  544
  571
  599
  628
  659
  691
  725
  761
  798
  838
  879
  923
  968
  1,016
  1,067
  1,120
  1,175
  1,234
  1,295
  1,360
  1,428
EBITDA, $m
  408
  405
  424
  444
  464
  486
  510
  534
  560
  587
  615
  645
  676
  710
  744
  781
  819
  860
  902
  947
  993
  1,043
  1,094
  1,149
  1,206
  1,265
  1,328
  1,394
  1,464
  1,537
  1,613
Interest expense (income), $m
  19
  19
  21
  23
  24
  26
  28
  30
  33
  35
  38
  40
  43
  46
  49
  52
  55
  59
  63
  66
  70
  75
  79
  84
  89
  94
  100
  105
  111
  118
  124
Earnings before tax, $m
  343
  339
  354
  369
  386
  404
  422
  442
  462
  484
  506
  531
  556
  582
  610
  639
  670
  702
  736
  771
  809
  848
  889
  932
  978
  1,026
  1,076
  1,128
  1,184
  1,242
  1,303
Tax expense, $m
  100
  91
  95
  100
  104
  109
  114
  119
  125
  131
  137
  143
  150
  157
  165
  173
  181
  189
  199
  208
  218
  229
  240
  252
  264
  277
  290
  305
  320
  335
  352
Net income, $m
  243
  247
  258
  270
  282
  295
  308
  322
  337
  353
  370
  387
  406
  425
  445
  466
  489
  512
  537
  563
  590
  619
  649
  681
  714
  749
  785
  824
  864
  907
  951

BALANCE SHEET

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and short-term investments, $m
  192
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Total assets, $m
  1,416
  1,280
  1,340
  1,402
  1,468
  1,538
  1,611
  1,688
  1,770
  1,855
  1,945
  2,039
  2,139
  2,243
  2,353
  2,469
  2,590
  2,718
  2,852
  2,993
  3,141
  3,296
  3,460
  3,631
  3,811
  4,001
  4,200
  4,409
  4,628
  4,858
  5,100
Adjusted assets (=assets-cash), $m
  1,224
  1,280
  1,340
  1,402
  1,468
  1,538
  1,611
  1,688
  1,770
  1,855
  1,945
  2,039
  2,139
  2,243
  2,353
  2,469
  2,590
  2,718
  2,852
  2,993
  3,141
  3,296
  3,460
  3,631
  3,811
  4,001
  4,200
  4,409
  4,628
  4,858
  5,100
Revenue / Adjusted assets
  1.674
  1.674
  1.674
  1.675
  1.674
  1.674
  1.674
  1.674
  1.673
  1.674
  1.674
  1.674
  1.674
  1.674
  1.674
  1.674
  1.674
  1.674
  1.674
  1.674
  1.674
  1.674
  1.674
  1.674
  1.674
  1.674
  1.674
  1.674
  1.674
  1.674
  1.674
Average production assets, $m
  459
  480
  502
  526
  551
  577
  604
  633
  664
  696
  729
  765
  802
  841
  882
  926
  971
  1,019
  1,069
  1,122
  1,178
  1,236
  1,297
  1,362
  1,429
  1,500
  1,575
  1,653
  1,735
  1,822
  1,913
Working capital, $m
  542
  366
  384
  401
  420
  440
  461
  483
  507
  531
  557
  584
  612
  642
  674
  707
  741
  778
  816
  857
  899
  944
  990
  1,039
  1,091
  1,145
  1,202
  1,262
  1,325
  1,391
  1,460
Total debt, $m
  507
  550
  595
  643
  693
  746
  802
  861
  922
  988
  1,056
  1,128
  1,204
  1,283
  1,367
  1,455
  1,548
  1,645
  1,747
  1,854
  1,967
  2,086
  2,210
  2,341
  2,478
  2,623
  2,774
  2,933
  3,101
  3,276
  3,461
Total liabilities, $m
  933
  976
  1,021
  1,069
  1,119
  1,172
  1,228
  1,287
  1,348
  1,414
  1,482
  1,554
  1,630
  1,709
  1,793
  1,881
  1,974
  2,071
  2,173
  2,280
  2,393
  2,512
  2,636
  2,767
  2,904
  3,049
  3,200
  3,359
  3,527
  3,702
  3,887
Total equity, $m
  483
  305
  319
  334
  349
  366
  383
  402
  421
  441
  463
  485
  509
  534
  560
  588
  616
  647
  679
  712
  747
  784
  823
  864
  907
  952
  1,000
  1,049
  1,101
  1,156
  1,214
Total liabilities and equity, $m
  1,416
  1,281
  1,340
  1,403
  1,468
  1,538
  1,611
  1,689
  1,769
  1,855
  1,945
  2,039
  2,139
  2,243
  2,353
  2,469
  2,590
  2,718
  2,852
  2,992
  3,140
  3,296
  3,459
  3,631
  3,811
  4,001
  4,200
  4,408
  4,628
  4,858
  5,101
Debt-to-equity ratio
  1.050
  1.800
  1.870
  1.930
  1.980
  2.040
  2.090
  2.140
  2.190
  2.240
  2.280
  2.320
  2.360
  2.400
  2.440
  2.480
  2.510
  2.540
  2.570
  2.600
  2.630
  2.660
  2.680
  2.710
  2.730
  2.750
  2.780
  2.800
  2.810
  2.830
  2.850
Adjusted equity ratio
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238
  0.238

CASH FLOW

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income, $m
  243
  247
  258
  270
  282
  295
  308
  322
  337
  353
  370
  387
  406
  425
  445
  466
  489
  512
  537
  563
  590
  619
  649
  681
  714
  749
  785
  824
  864
  907
  951
Depreciation, amort., depletion, $m
  45
  47
  49
  51
  54
  56
  59
  62
  65
  68
  71
  74
  78
  82
  86
  90
  94
  99
  104
  109
  114
  120
  126
  132
  139
  146
  153
  160
  168
  177
  186
Funds from operations, $m
  407
  294
  307
  321
  336
  351
  367
  384
  402
  421
  441
  462
  484
  507
  531
  556
  583
  611
  641
  672
  705
  739
  775
  813
  853
  894
  938
  984
  1,033
  1,084
  1,137
Change in working capital, $m
  54
  16
  17
  18
  19
  20
  21
  22
  23
  24
  26
  27
  28
  30
  31
  33
  35
  37
  38
  40
  42
  45
  47
  49
  52
  54
  57
  60
  63
  66
  69
Cash from operations, $m
  353
  329
  290
  303
  317
  331
  346
  362
  379
  397
  415
  435
  455
  477
  499
  523
  548
  575
  602
  632
  662
  694
  728
  764
  801
  840
  881
  924
  970
  1,018
  1,068
Maintenance CAPEX, $m
  0
  -45
  -47
  -49
  -51
  -53
  -56
  -59
  -61
  -64
  -68
  -71
  -74
  -78
  -82
  -86
  -90
  -94
  -99
  -104
  -109
  -114
  -120
  -126
  -132
  -139
  -146
  -153
  -160
  -168
  -177
New CAPEX, $m
  -143
  -21
  -22
  -23
  -25
  -26
  -27
  -29
  -30
  -32
  -34
  -35
  -37
  -39
  -41
  -43
  -46
  -48
  -50
  -53
  -56
  -58
  -61
  -64
  -68
  -71
  -75
  -78
  -82
  -86
  -91
Cash from investing activities, $m
  -143
  -66
  -69
  -72
  -76
  -79
  -83
  -88
  -91
  -96
  -102
  -106
  -111
  -117
  -123
  -129
  -136
  -142
  -149
  -157
  -165
  -172
  -181
  -190
  -200
  -210
  -221
  -231
  -242
  -254
  -268
Free cash flow, $m
  210
  263
  221
  231
  241
  252
  263
  275
  287
  300
  314
  328
  344
  360
  377
  394
  413
  433
  453
  475
  498
  522
  547
  573
  601
  630
  661
  693
  727
  763
  800
Issuance/(repayment) of debt, $m
  11
  43
  45
  48
  50
  53
  56
  59
  62
  65
  68
  72
  76
  80
  84
  88
  93
  97
  102
  107
  113
  118
  124
  131
  137
  144
  152
  159
  167
  176
  184
Issuance/(repurchase) of shares, $m
  -36
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash from financing (excl. dividends), $m  
  -27
  43
  45
  48
  50
  53
  56
  59
  62
  65
  68
  72
  76
  80
  84
  88
  93
  97
  102
  107
  113
  118
  124
  131
  137
  144
  152
  159
  167
  176
  184
Total cash flow (excl. dividends), $m
  175
  306
  267
  279
  291
  305
  319
  333
  349
  365
  382
  400
  419
  439
  460
  482
  505
  530
  555
  582
  611
  640
  671
  704
  739
  775
  813
  852
  894
  938
  984
Retained Cash Flow (-), $m
  -95
  -14
  -14
  -15
  -16
  -17
  -17
  -18
  -19
  -20
  -21
  -22
  -24
  -25
  -26
  -27
  -29
  -30
  -32
  -34
  -35
  -37
  -39
  -41
  -43
  -45
  -47
  -50
  -52
  -55
  -58
Prev. year cash balance distribution, $m
 
  192
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash flow adjustment, $m
 
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
  0
Cash available for distribution, $m
 
  484
  253
  264
  276
  288
  301
  315
  330
  345
  361
  378
  396
  414
  434
  455
  477
  499
  524
  549
  575
  603
  633
  663
  696
  730
  765
  803
  842
  883
  927
Discount rate, %
 
  4.30
  4.52
  4.74
  4.98
  5.23
  5.49
  5.76
  6.05
  6.35
  6.67
  7.00
  7.35
  7.72
  8.11
  8.51
  8.94
  9.39
  9.86
  10.35
  10.87
  11.41
  11.98
  12.58
  13.21
  13.87
  14.56
  15.29
  16.05
  16.86
  17.70
PV of cash for distribution, $m
 
  464
  231
  230
  227
  223
  219
  213
  206
  198
  189
  179
  169
  158
  146
  134
  121
  109
  96
  84
  73
  62
  52
  43
  35
  28
  22
  17
  13
  10
  7
Current shareholders' claim on cash, %
  100
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0
  100.0

NewMarket Corporation, through its subsidiaries, engages in the petroleum additives businesses. It offers lubricant additives for use in various vehicle and industrial applications, such as engine oils, transmission fluids, off-road powertrain and hydraulic systems, gear oils, hydraulic oils, turbine oils, metalworking fluids, and in other applications where metal-to-metal moving parts are utilized; and engine oil, driveline, and industrial additives. The company also provides fuel additives that are used to enhance the oil refining process and the performance of gasoline, diesel, biofuels, and other fuels to industry, government, original equipment manufacturers (OEMs), and individual customers. It has operations in the United States, Canada, Europe, the Asia Pacific, India, Latin America, and the Middle East. NewMarket Corporation was founded in 1887 and is headquartered in Richmond, Virginia.

FINANCIAL RATIOS  of  NewMarket (NEU)

Valuation Ratios
P/E Ratio 22.2
Price to Sales 2.6
Price to Book 11.2
Price to Tangible Book
Price to Cash Flow 15.3
Price to Free Cash Flow 25.7
Growth Rates
Sales Growth Rate -4.3%
Sales - 3 Yr. Growth Rate %
EPS Growth Rate %
EPS - 3 Yr. Growth Rate %
Capital Spending Gr. Rate 12.6%
Cap. Spend. - 3 Yr. Gr. Rate 19.8%
Financial Strength
Quick Ratio NaN
Current Ratio 0
LT Debt to Equity 105%
Total Debt to Equity 105%
Interest Coverage 19
Management Effectiveness
Return On Assets 19%
Ret/ On Assets - 3 Yr. Avg. 19.3%
Return On Total Capital 26%
Ret/ On T. Cap. - 3 Yr. Avg. 27.3%
Return On Equity 55.8%
Return On Equity - 3 Yr. Avg. 53.9%
Asset Turnover 1.5
Profitability Ratios
Gross Margin 33.2%
Gross Margin - 3 Yr. Avg. 31.1%
EBITDA Margin 19.9%
EBITDA Margin - 3 Yr. Avg. 18.5%
Operating Margin 17.7%
Oper. Margin - 3 Yr. Avg. 16.6%
Pre-Tax Margin 16.7%
Pre-Tax Margin - 3 Yr. Avg. 15.7%
Net Profit Margin 11.9%
Net Profit Margin - 3 Yr. Avg. 11%
Effective Tax Rate 29.2%
Eff/ Tax Rate - 3 Yr. Avg. 30%
Payout Ratio 31.3%

NEU stock valuation input parameters

Revenue. Company's revenue (or sales) is always the starting point of any cash flow forecast. In the NEU stock intrinsic value calculation we used $2049 million for the last fiscal year's total revenue generated by NewMarket. The default revenue input number comes from 2016 income statement of NewMarket. You may change it if you feel that it should be adjusted for some unusual circumstances that are not expected to be repeated in the future or if you already know (from interim financial statements, for example) that this year's revenue is going to be quite different.

Revenue growth rate. Forecasted future revenue growth rate is the most important input parameter for the intrinsic value calculation. Unlike other input parameters that are reasonably expected to be in line with their historic averages or their historic trends, the revenue growth rate by and large is a wild card: nobody really knows what the company's revenue will be in the future. Of course, the level of unpredictability is different for different industries (utility companies being the most predictable and, thus, less risky).
    We use three input parameters to forecast the revenue growth rate in our NEU stock valuation model: a) initial revenue growth rate of 4.6% whose default value is the revenue growth rate in the most recent quarter compared to the quarterly revenue a year ago; b) terminal revenue growth rate of 5% whose default value is chosen to be close to the average nominal (i.e. not adjusted for inflation) GDP growth rate; and c) revenue decline factor of 0.9, which stipulates that revenue growth rate in each forecasted year will be equal to the difference of the revenue growth rate in the preceding year and the terminal revenue growth rate multiplied by this revenue decline factor (with the passage of time the revenue growth rate will be approaching the terminal revenue growth rate, but not quite reaching it - though the difference could be infinitesimally small).
    At the revenue decline factor of 1, the future revenue growth rate is forecasted to be constant and equal to the initial revenue growth rate. The smaller the revenue decline factor, the faster the revenue growth rate will approach the terminal revenue growth.

Discount rate. The discount rate is used for determining the present value of future cash flows: future cash flows are "discounted" as at normal conditions (that translate into positive expected return on investment) one dollar today is worth more than the same dollar in the future. Unlike all other valuation models, we use variable discount rate, i.e. it increases for each consecutive year. This is done to account for higher risk of cash flows coming in further in the future.
    The initial discount rate of 4.3%, whose default value for NEU is calculated based on our internal credit rating of NewMarket, is applied to the cash flow expected to be received a year from now (well, actually, to be precise, in the financial year following the base year - the last year for which we have financial statements). For each consecutive year the discount rate is multiplied by the discount rate multiplier of 1.05, e.i. each year it increases by 5%. Feel free to change this number to correspond to your level of risk assessment of NewMarket.
    By the way, it is easy to set the discount rate to be constant (this would make comparison with other valuation models easier): just set the discount rate multiplier equal to 1 and chose the magnitude of the initial discount rate to your liking.

Variable cost ratio is the ratio of variable costs (i.e. costs that fluctuate with fluctuation of the volume of production) to the revenue expressed as a percentage. In the calculation of intrinsic value of NEU stock the variable cost ratio is equal to 83.3%.

Fixed operating expenses is just that - expenses that are not dependant on the volume of production. They are set to $0 million in the base year in the intrinsic value calculation for NEU stock. These expenses increase with the level of inflation in subsequent years.

Interest rate on debt is the average all-in rate of interest paid by the company on its debt. It is set at 3.8% for NewMarket.

Corporate tax rate of 27% is the nominal tax rate for NewMarket. In reality, companies find ways to pay much less taxes than that or not to pay them at all.

Cash flow adjustment could be used for any adjustment the investor deems necessary. Most commonly we use this field to account for stock options-related effects in excess of what is reported on the company's income statement. The cash flow adjustment is expressed as a percentage of the revenue, and in the current valuation of the NEU stock is equal to 0%.

Production assets are the company's assets used for manufacturing products or provision of services. In the valuation model input table they are expressed as a percentage of revenue and for NEU are equal to 22.4%.

Life of production assets of 10.3 years is the average useful life of capital assets used in NewMarket operations. It is used to calculate yearly capital expenditures needed to keep these assets in good order - we call it the maintenance CAPEX.

Working capital is the difference between the company's current assets and liabilities. In the model we use the ratio of working capital to revenue, which for NEU is equal to 17.1%. A negative number means that the company is apt at using financial resources of its suppliers and customers; a large positive number, on the other hand, means that it either provides in-kind financing to others or is not good at managing its inventories.

Book value of equity - $483 million for NewMarket - is used in calculation of the "floor" for intrinsic valuation based on the discounted cash flow (DCF) method. Even if the prospects are very bad for a company, its assets could always be sold now for their current fair market value.

Shares outstanding of 11.87 million for NewMarket is needed to calculate the intrinsic value of one share.

Market capitalization is used here only for reference purposes and as a quick check that the share price and the number of shares outstanding numbers are correct - something especially to be cognizant about at stock splits. So, the market capitalization of NewMarket at the current share price and the inputted number of shares is $5.4 billion.


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Stock chart of NEU Financial statements of NEU
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The paper VALUATION OF STOCKS: The Quest for Intrinsic Value provides a detailed description of our valuation model and discloses the calculation algorithm.

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